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G.R. No. 104171 February 24, 1999


BF Goodrich Phils., Inc. (now Sime Darby International Tire Co, Inc.), was an American-owned and
controlled corporation previous to July 3, 1974. As a condition for approving the manufacture by private
respondent of tires and other rubber products, the Central Bank required that it should develop a rubber
plantation. In compliance, private respondent purchased from the Philippine government in 1961, under
the Public Land Act and the Parity Amendment to the 1935 Constitution, certain parcels of land located
in Tumajubong, Basilan, and there developed a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon
the expiration of the Parity Amendment on July 3, 1974, the ownership rights of Americans over public
agricultural lands, including the right to dispose or sell their real estate, would be lost. On the basis of
this Opinion, private respondent sold to Siltown Realty Philippines, Inc. on January 21, 1974, its Basilan
landholding for P500,000 payable in installments. In accord with the terms of the sale, Siltown Realty
Philippines, Inc. leased the said parcels of land to private respondent for a period of 25 years, with an
extension of another 25 years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private
respondent were examined for the purpose of determining its tax liability for taxable year 1974. The
examination resulted in the April 23, 1975 assessment of private respondent for deficiency income tax in
the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum
Authority Reference No. 749157 for the purpose of examining Siltown's business, income and tax
liabilities. On the basis of this examination, the BIR commissioner issued against private respondent on
October 10, 1980, an assessment for deficiency in donor's tax in the amount of P1,020,850, in relation to
the previously mentioned sale of its Basilan landholdings to Siltown. Apparently, the BIR deemed the
consideration for the sale insufficient, and the difference between the FMV and the actual purchase price
a taxable donation.

In a letter dated November 24, 1980, private respondent contested this assessment. On April 9, 1981, it
received another assessment dated March 16, 1981, which increased to P 1,092,949 the amount
demanded for the alleged deficiency donor's tax, surcharge, interest and compromise penalty.

CTA: Private respondent appealed the correctness and the legality of these last two assessments BUT
after trial in due course, it ordered to pay the amount of P1,311,179.01 plus 10% surcharge and 20%
annual interest from March 16, 1981 until fully paid.

CA: reversed the CTA, as follows: What is involved here is not a first assessment; nor is it one within the
5-year period stated in Section 331 above. Since what is involved in this case is a multiple assessment
beyond the five-year period, the assessment must be based on the grounds provided in Section 337, and
not on Section 15 of the 1974 Tax Code. Section 337 utilizes the very specific terms "fraud, irregularity,
and mistake". "Falsity does not appear to be included in this enumeration. Falsity suffices for an
assessment, which is a firstassessment made within the five-year period. When it is a subsequent
assessment made beyond the five-year period, then, it may be validly justified only by "fraud, irregularity
and mistake" on the part of the taxpayer.

Issues: Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as
ruled by public respondent Court of Appeals


Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding
section, internal-revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after expiration of
such period. For the purposes of this section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the March
1981 assessments were issued by the BIR beyond the five-year statute of limitations. The Court has
thoroughly studied the records of this case and found no basis to disregard the five-year period of
prescription. As succinctly pronounced by the Court of Appeals:

The subsequent assessment made by the respondent Commissioner on October 40, 1980, modified by that
of March 16, 1981, violates the law. Involved in this petition is the income of the petitioner for the year
1974, the returns for which were required to be filed on or before April 15 of the succeeding year. The
returns for the year 1974 were duly filed by the petitioner, and assessment of taxes due for such year —
including that on the transfer of properties on June 21, 1974 — was made on April 13, 1975 and
acknowledged by Letter of Confirmation No. 101155 terminating the examination on this subject.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis for the
assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the
Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable."

Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of
a false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any
time within ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser
than its declared fair market value. This fact alone did not constitute a false return which contains
wrong information due to mistake, carelessness or ignorance. It is possible that real property may be
sold for less than adequate consideration for a bona fide business purpose; in such event, the sale
remains an "arm's length" transaction. In the present case, the private respondent was compelled to
sell the property even at a price less than its market value, because it would have lost all ownership
rights over it upon the expiration of the parity amendment. In other words, private respondent was
attempting to minimize its losses. At the same time, it was able to lease the property for 25 years,
renewable for another 25. This can be regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than its declared fair
market value did not by itself justify a finding of false return. Indeed, private respondent declared the
sale in its 1974 return submitted to the BIR. Within the five-year prescriptive period, the BIR could have
issued the questioned assessment, because the declared fair market value of said property was of public
record. This it did not do, however, during all those five years. Moreover, the BIR failed to prove that
respondent's 1974 return had been filed fraudulently. Equally significant was its failure to prove
respondent's intent to evade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with
intent to evade the payment of the correct amount of tax. Moreover, even though a donor's tax, which
is defined as "a tax on the privilege of transmitting one's property or property rights to another or others
without adequate and full valuable consideration," is different from capital gains tax, a tax on the gain
from the sale of the taxpayer's property forming part of capital assets, the tax return filed by private
respondent to report its income for the year 1974 was sufficient compliance with the legal requirement
to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation
does not change the fact that private respondent already reported its income for 1974 by filing an
income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the
intent to evade tax, or that it had failed to file a return at all, the period for assessments has obviously
prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become
moot and unnecessary.

WHEREFORE, the Petition for Review is DENIED.